Canada has possibly entered a recession if advanced estimates prove correct in showing the economy contracted in the third quarter since gross domestic product was negative in the second quarter, indicating the central bank could be finished with rate hikes.

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Preliminary data showed gross domestic product remained essentially unchanged in September, Statistics Canada said on Oct. 31. The mining, quarrying and oil and gas extraction industries, as well as utilities decreased during the month, but were partially offset by increases in construction and the public sector.

If September’s GDP doesn’t change when the official data lands on Nov. 30, the third quarter will have contracted by an annualized 0.1 per cent and put Canada in a technical recession since the economy contracted 0.2 per cent in the second quarter, Stephen Brown, deputy chief economist for North America at Capital Economics Ltd., said in a note to clients.

“It seems more likely that the modest recession we are forecasting has now begun,” he said.

The reading for the third quarter supports the Bank of Canada’s belief that demand is cooling as its interest rate increases work their way through the economy. The governing council elected to keep interest rates at five per cent last week and governor Tiff Macklem said he expects GDP growth to slow to one per cent for the next several quarters.

GDP growth in August “essentially stalled” as wildfires raged across the country and disrupted key sectors, drought dried up economic activity and stubbornly high inflation took some steam out of demand, Statistics Canada said. Forecasters expected the August headline number to line up with the preliminary estimate of 0.1 per cent growth.

It seems more likely that the modest recession we are forecasting has now begun

Stephen Brown, deputy chief economist for North America, Capital Economics

Wholesale trade grew 2.3 per cent in August for the third time in four months, supported by higher activity in agricultural supplies and recyclable material wholesalers. Mining, quarrying and oil and gas extraction rose 1.2 per cent, with the oil and gas subsector rising for the seventh time in the past eight months, bringing it to its highest level since April 2019.

The agricultural and forestry sector had the largest decline, dropping 3.2 per cent from the previous month, while the service sector rose only 0.1 per cent due to declines in retail, hotels and restaurants and professional services.

During the third quarter, the economy experienced pressure from several temporary factors, Charles St-Arnaud, chief economist at Alberta Central, said in a note.

Workers fed up with inflation that’s remained stubbornly high hit picket lines across the country, including port workers in both British Columbia and on the St. Lawrence River, while forest fires and abnormal drought conditions also weighed on the economy.

Those kinds of events can muddy the data, but St-Arnaud said the evidence is building that the economy is cooling.

“Interestingly, many sectors linked to consumer discretionary spending, namely accommodation and food services, and real estate, continue to underperform, showing that household spending is weakening in reaction to higher interest rates,” St-Arnaud said.

The Bank of Canada last week forecasted growth of 0.8 per cent in the third quarter, down from the 1.5 per cent it had forecast in July.

The central bank has said there’s evidence consumers are pulling back on spending, which is what it wants in order to bring supply and demand back in balance.

Still, the strength of the labour market could ultimately determine whether the landing back to normalcy will be soft or hard, St-Arnaud said.

“Nevertheless, with wage growth remaining elevated, potentially leading to stickier inflation, the BoC is likely to continue to leave the door open to further rate hikes if necessary,” he said.

In September, hourly wages increased five per cent, higher than the headline inflation figure of 3.8 per cent, Statistics Canada said earlier this month. Higher wages increase the consumer’s purchasing power and can boost inflation.

Economists at National Bank of Canada described the GDP data in both August and September as “not yet a horror movie,” but “an intense thriller.” They also said the economic slowdown looks weaker when considering the growth in Canada’s population, which surpassed 40 million this year.

Per-capita GDP dropped 2.4 per cent in the third quarter compared to last year, the first time such a drop has occurred outside of a recession, according to National Bank economists Matthieu Arseneau and Kyle Dahms.

“Given the time needed for rate hikes to have their full impact on consumption (estimated at eight quarters), it means that no less than 43 per cent of the impact of rate hikes has yet to be felt on consumption,” they said in a note.

The central bank began lifting rates in January 2022, and has raised rates 11 times in the past year and a half.

Most economists expect the central bank has finished its tightening cycle with no further increases forecast. Macklem said he expects inflation to return to the central bank’s target of two per cent by 2025 and for growth to pick up in late 2024, eventually reaching 2.5 per cent in 2025, but he hasn’t closed the door on further hikes.

In the meantime, the economy is moving from excess demand to excess supply, he said.

• Email: bbharti@postmedia.com

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